TPG Telecom Limited (TPG) Earnings Call Transcript & Summary

This is James Hall speaking from the TPG Telecom Investor Relations team. Welcome to the presentation of our results for the half year ended 30 June 2022. This is a prerecorded presentation available prior to a live Q&A session at 10:30 a.m. TPG Telecom acknowledges the traditional custodians of country throughout Australia and the lands on which we and our communities live, work and connect. We pay our respects to their elders, past, present and emerging. Our CEO, Iñaki Berroeta, will begin today's presentation with the result highlights and business update. Our CFO, Grant Dempsey, will then present our financial performance in more detail before Iñaki closes off the presentation with a summary of our strategy and outlook.

Thank you, James, and good day to all of you listening to our presentation. Our first half results reflect strong progress on delivery of our strategy. We have emerged from an intense period of business integration, transformation and market uncertainty. Now with good momentum building towards a new phase of growth, which is accelerating into the second half. We recorded a strong mobile customer growth in the hub, adding 135,000 subscribers and returning to ARPU growth. In Home broadband, we are driving profitability by managing NBN margins as we grow our on-net customer base primarily through our fixed wireless proposition. In enterprise and government, we continue to deliver important customer wins with large business customers on the back of our ability to deploy a mix of on-net fiber and NBN connectivity. We are focused on mobile convergence and building our managed service capability. In wholesale, we are progressing our G.Fast deployment and looking forward to the opportunities of functional separation in our residential access business later this year. This was also a half of a strong transformation in the business. We started implementing a simplified organizational structure, signed a transformational renewal network sharing agreement to bring a stronger competition to regional Australia, accelerate our 5G rollout and complete the sale of our tower assets to [indiscernible]. EBITDA for the half year was $837 million, although this included restructuring costs of $35 million. The Board has declared a fully franked interim dividend of $0.09 per share, up 12.5% on the 2021 interim dividend. Looking to the full year, we remain on track to deliver annualized synergies from the VHA-TPG merger in line with our target of $125 million to $150 million this year, 1 year earlier than originally planned back in 2020. There is accelerating momentum with earnings to be weighted to the second half as we build on a strong second quarter and benefit from the full run rate of our growing mobile subscriber base. Now looking at our performance in more detail and starting with mobile, as we highlighted in the Investor Day, we have several levers to drive service revenue growth in consumer mobile and significant opportunity in enterprise mobile. The power of the Vodafone 5G global network and our cross-selling efforts are connecting with customers, and we are reducing churn across our brands. The strong subscriber growth in the half reflects especially a strong growth in prepaid following the return of international travel as well as growth in our postpaid base. International arrivals in July this year were 54% of the July 2019 pre-COVID level. And our Vodafone and Lebara brands are performing especially well in this segment. International roaming has also supported ARPU recovery in postpaid, which increased 2.2% to $42 compared with the first half of 2021. Roaming was around 55% of recovered levels for the half but was closer to the 70% of pre-COVID levels in June, which goes well for the second half of the financial year. In fixed, our focus is on improving profitability through fixed wireless growth and NBN margin management. We began communicating this week some modest increases to the prices of our lower speed NBN plans across parts of our customer base. It is important to point out these price increases do not apply to our fastest NBN plans, our superfast net fixed broadband products or our fixed wireless plans. We have done this because the amounts we paid to NBN for the use of its network have increased significantly as a consequence of Australians relying more on their home broadband when they work and study from home. These factors have benefited NBN, but continue to put margin pressure on the retail service providers that are supporting the connectivity needs of many Australians. For our fixed wireless business, we reported a 33,000 increase in subscribers in the period to 113,000 and remain confident on achieving our 160,000 subscriber target in December as we tackle supply chain constraints pertaining to modern availability and chipset shortages. Importantly, our on-net products are delivering a margin benefit over NBN products, consistent with our expectations, which, along with our pricing actions, will support improved fixed margins over time. Looking further ahead, we continue to consider the use of millimeter wave spectrum across the major capital to support further fixed wireless growth post 2025. Now turning to our proposed network-sharing agreement with Telstra and Regional Australia announced in February, which remains subject to ACCC approval, network sharing is a smart and efficient way to enter the regional market. Not only does it increase service choice for customers in the cities and the regions, it avoids duplicating infrastructure, the cost of which will ultimately have to be paid for by consumers. Regardless, we are ready to deliver a step change in regional competition, and it's clear that is what customers want. The ACCC public consultation process concluded in July, attracting overwhelmingly supportive submissions from community groups and customers. We have been undertaking technical testing and expect to be ready to turn on the share regional networks or after the ACCC makes its decision. This plan will establish a new era of increased choice and competition for Australian consumers and businesses. It will strengthen our proposition not just in the regions but for all Australians, increasing our addressable market by 60%. The outlook is also exciting for our wholesale business. In April, the ACCC accepted TPG's joint functional separation undertaking which will come into effect on the 7th of October of this year. This undertaking will apply to all local access lines we control to the extent they are used to supply superfast carriage services wholly or principally to residential customers. This includes our existing FTTP networks in metro locations, the TransACT VDSL network in the ACT our HFC networks in Ballarat, Mildura and Geelong as well as any new superfast local access lines we deploy. Functional separation enable us to offer access to these networks under one structure to other retail service providers. This presents a significant opportunity to grow from our current base of 135,000 subscribers on these networks into the 400,000 premises we pass while creating a platform for additional growth. As the chart on the right of the slide shows, demand for data traffic is expected to far outstrip growth in total broadband subscribers in coming years, and that means more customers will be looking for higher speeds at predictable prices. We can offer up to gigabyte per second speeds on FTTB enabled by G.Fast technology deployment under a simpler pricing structure than NBN. As part of the evolution of this business, we will be reporting the wholesale component of the circa $110 million of annualized revenue we generated from these networks in the enterprise, government and wholesale segment from our fiscal year '23 results rather than in consumer. Our sustainability strategy continues to evolve and develop following its launch last October. We are making good progress on achieving recognition across the 4 categories of consumer well-being, environmental responsibility, inclusion and belonging and digital economy. Environmental responsibility is a key focus given the urgent need for action on climate change. Tendering is underway to support our commitment to power our Australian operations with 100% renewable electricity by 2025. We are currently completing the tail mapping of our carbon emissions, including scope 3 emissions and on track to submit our reduction targets to the science-based target initiative by the end of the year. We are also planning to publish the TCFD report with our 2022 annual results, and we are exploring options to introduce sustainability elements to debt financing. I will now talk about the outlook before handing to Grant. TPG Telecom is entering a new phase of growth, following a complex period of intense business integration and disruption from the pandemic with accelerating earnings momentum into the second half of the year. As the chart on the left shows, we have turned a corner in terms of service revenue returning to growth in the second quarter. 7 weeks into the third quarter, we are very confident of delivering an increased rate of service revenue growth. EBITDA is also returning to growth. Excluding the impact of restructuring costs, first half 2022 EBITDA exceeded the second half of 2021, and we are well positioned for a strong increase in second half earnings. We will have the full run rate benefit of our higher mobile subscriber base with fixed margins supported by fixed wireless growth and discipline in NBN plan pricing and roaming revenue recovery by increasing international travel. We also remain on track to realize the full $125 million to $150 million of synergies from the VHA-TPG merger. We anticipate total restructuring cost for the year will be between $55 million and $60 million, including the $35 million incurred in the first half. I will now hand to Grant to discuss our financial performance in more detail.

Thank you, Iñaki, and good morning, all. I will start with a summary of our financial performance. Overall, the first half was somewhat of an inflection point with momentum building for growth in the second half. After a sustained period of negative headwinds, service revenue was modestly up year-over-year at $2.19 billion. However, it was only in the last few months that the strong subscriber momentum we have been generating since late 2021, started to translate to earnings growth. That momentum is continuing to build into the second half. Gross margin was down slightly at $1.38 billion, reflecting the impact of higher NBN costs and reduced margin on handset sales. Operating costs continued to trend down to $508 million for the first half when you exclude the $35 million of restructuring costs. This reflects the streamlining of our organizational structure early in the half as we transition from synergy realization to the next phase of simplification and transformation focused on unlocking our growth potential. EBITDA of $872 million, excluding the restructuring costs, was marginally down on the first half of 2021, but our current momentum points to strong earnings growth in the second half. Statutory NPAT was bolstered by a recognition of $110 million of capital tax losses to be utilized against the tower asset sales as well as lower financing costs. The restructuring costs and increase in CapEx, in line with accelerated 5G rollout we've already flagged, translated to a $100 million reduction in our operating free cash flow metrics. Adjusted net PAT was almost 4% higher, which, along with our earnings momentum and strengthened balance sheet, supported a very strong 12.5% increase in first half dividend per share. Let's now look at consumer gross margin a little more closely. Service margin was largely unchanged, but underneath that was the pivot from negative year-on-year comparisons coming into the year to positive corresponding growth as we finish the second quarter, driven largely by subscriber growth momentum, which turned positive late last year. Service revenue and margin improvements both tend to lay customer metrics by a few months. We entered the year with subscriber numbers behind the start of the first half of 2021, but finished the half ahead of where we were in June last year, with this positive momentum continuing into the second half. We did have a modest negative ARPU impact in prepaid from a change in customer mix with a particularly strong performance from the more budget-focused international brand, Lebara. In our fixed business, we continue to drive home the strategic focus of improving margin. This half, for the first time, we saw more NBN customers migrate to higher-margin fixed wireless and customers moving to the NBN from legacy DSL products. With that legacy headwind largely behind us, we will see increased benefits from the growth in our on-net products. On the cost side, the ongoing impact of higher CVC costs unfortunately overshadowed the benefits we obtained from driving down other telco costs. Our tactical NBN price actions implemented this week, alongside continued fixed wireless growth, we'll look to reverse the decline in margins we've seen since COVID and recover ongoing cost pressures. Handset accessory and hardware margins were down markedly, reflecting both higher handset costs and increased interest cost for handset receivables financing. We continue to review the role of off-balance sheet handset financing in our capital structure, given the current interest rate environment and our overall lower bank debt post the tower asset sale. In enterprise, government and wholesale, the gross margin comparison was largely flat, but with some significant offsetting drivers. Momentum is building with new products and customer growth, but that was largely offset by the roll-off of legacy fixed contracts and higher NBN costs. Going forward, we expect growth momentum to continue, while the negative year-on-year impact of legacy contracts rolling off will reduce over the next 12 to 18 months. Excluding one-off restructuring costs, our operating expenditure fell slightly versus the first half of 2021. This was largely driven by lower employee costs resulting from the simplification of our organizational structure earlier this year. Technology costs were up slightly, primarily as a result of modestly higher electricity prices and higher energy leases arising from increased network upgrade activities. Our electricity hedging profile continues to protect us in the short to medium term from the extremes of the spot price movements. Restructuring costs reflected both redundancies from the organizational simplification and one-off investments we are making in delivering broader transformation over time. This aims to simplify the business dramatically, which create a scalable platform, ready to take advantage of the various opportunities we have to grow service revenue over time. We anticipate that we will continue to incur restructuring costs as we execute the simplification strategy over the next couple of years. We estimate the 2022 full year cost to end up in the $55 million to $60 million range, including the $35 million incurred in the first half. Turning now to our balance sheet, where we continue to focus on optimizing how we fund our assets and our growth. We received the $890 million of proceeds from the tower asset sales on the 29th of July and have already paid down about $860 million of debt. This includes reducing revolving debt drawn as well as the permanent reduction in a syndicated term debt of $550 million. The sale also enabled us to fund our long-dated network infrastructure assets more efficiently with long-term leases, creating a natural hedge for future movements in interest rates. The significant headroom created by the reduction of our debt also gives us increased optionality in relation to our current use of third parties to finance consumer handset receivables. On a 30 June basis, pro forma for this pay down, we had net debt of just under $3.5 billion. We have increased our level of interest rates hedging since balance date noting that about 40% of our total borrowings are already effectively hedged by long-term leases. Our attention will now turn to terming out the remainder of the 2024 maturity and the appropriate long-term liability structure. We're in a strong position to maintain an investment-grade credit profile while continuing to support significant investments in our assets and growth opportunities as well as continue to progressively grow our dividends. Our fully franked interim dividend of $0.09 per share reflects the third consecutive $0.5 increase in the semiannual dividend and a 12.5% increase on the 2021 interim dividend. The dividend is declared by reference to adjusted net PAT, which adjusts statutory net PAT for amortization spectrum and acquired intangibles as well as nonrecurring costs and noncash tax impacts. For the full year, we anticipate to adjust for ongoing restructuring costs and the accounting gain of the tower asset sale. I will close by reiterating the capital allocation framework we set out at the Investor Day, which supports our growth and return on capital aspirations. The first 3 points are recurring in nature. We will continue to efficiently invest capital to sustain the value of our assets, maintain an investment-grade balance sheet and look to provide a minimum dividend payout ratio to our shareholders. The remaining 4 points of value maximization levers, which are discretionary and compete for capital based on return opportunities. We remain focused on portfolio management, reviewing options to share infrastructure and optimize financing structures and an ongoing assessment of the ownership structure for core and noncore assets. On CapEx, we expect elevated transformation investment to continue until the middle of the decade, delivering value-enhancing capabilities and platforms. This is mainly focused on accelerating our 5G capability, but we're also leaning into evolving the IT architecture and other investments required to create a sustainable and simplified platform to support growth. We will prioritize growth CapEx where returns are strong and where we can develop and extend our asset footprint to support customers. The final lever should the headroom become available is additional returns to shareholders. Indeed, all discretionary capital expended is compared on a long-term returns basis to the value of returning capital to our shareholders. I will now hand back to Iñaki.

Thank you, Grant. To close, let me first recap on our strategy. Back in 2020, we started the journey post the VHA-TPG merger with a focus on integration while sustaining operational performance. Today, we have 3 guiding principles in our strategy: one, integrate and simplify to create a strong, lean scalable base for our technology people, processes and brands, a sustainable, simpler platform to grow. Two, Win a smart targeting growth by delivering high-value products and services, leveraging our cost and infrastructure advantage. Three, maximize our potential. We believe TPG Telecom has a unique opportunity to become Australia's best telco for customers, for shareholders, for our people and for the community at large. The simplicity and value with which TPG has always been synonymous, are more relevant today than ever and our focus positions us to win at a time when the market is becoming more disciplined. As we look to the remainder of the year, we continue to execute our strategy. We have built a strong TPG Telecom culture, maintain the lowest cost structure in our industry and demonstrate a disciplined approach to managing our mobile and fiber network smartly and efficiently. We are experiencing a welcome return of momentum in customer growth and transforming our network position to deliver a step change in our ability to compete in all segments, in all technologies and across the country. Our growth momentum in mobile subscribers will contribute to stronger earnings in the second half as will the ongoing recovery in international travel. Our fixed wireless growth, coupled with our margin discipline on NBN plans will drive margin recovery in fixed. In enterprise, we will continue to grow customers, while in wholesale, we have a major growth opportunity in our residential access network business post functional separation. Having implemented a simpler organizational structure in the first half, we are positioned to deliver the final component of our $125 million to $150 million annualized merger synergy target for the full year, 1 year early. Most excited of all we are transforming our portfolio and our network. Through the proposed regional sharing agreement, we are ready to deliver a step change in coverage and competition in all parts of Australia. Through our 5G rollout, we are strengthening the speed and quality of our mobile coverage. And through our tower asset sale, we have introduced a more efficient capital structure for passive infrastructure. We are focused proudly on being a great value, simple telco and look forward to the remainder of the year. Thank you.

Good morning, everyone. This is James Hall speaking from TPG. Welcome to our Q&A session for our half year results for the 2022 financial year, and thank you for joining us. In the room with me, along with Iñaki Berroeta, our Managing Director and CEO; and Grant Dempsey, our CFO. We have several other of the executive team, Trent Czinner, our Group Executive for Legal and Corporate Affairs; Kieren Cooney, our Group Executive Consumer; Jonathan Rutherford, our Group Executive for Enterprise, Government and Wholesale; and Sean Crowley, our Deputy CFO; as well as myself and other members of the Investor Relations and Communications teams. I will now -- I will shortly hand over to Inaki to start. Before I do so, [Operator Instructions] And I will now hand over to Inaki to make some introductory comments before we hand over to Q&A.

Thank you, James, and thank you, everyone, for joining us today. I just wanted to start by saying that we have half year that was characterized by building a strong momentum. We started the year in a lower point than the corresponding period in 2021 and still under restrictions. But during this half and especially in the second quarter of the half recovery, very good customer gain. At the same time that we deal with some of the shortages that we anticipated on Fixed Wireless, and we exited this first half with a very strong momentum commercially. We see that also in the first weeks of the second half but also on the Fixed Wireless, we see now that we are going to be able to deliver better numbers, again, confirming that this 160,000 number that we mentioned for the second half. We also did significant restructuring in the business. This was done early in the half. And I think that all these factors between the customer momentum, the Fixed Wireless and also some of the reductions that we've done in the beginning of the year will really accelerate momentum into the second half of '22, where we will see -- we anticipate a single -- high single-digit EBITDA growth compared to the corresponding period of 2021. And that, I think, is my introduction. I think that we are now ready to get any questions. And once again, thank you very much for joining us today.

Thank you, Iñaki. The first question is from Eric Choi at Barrenjoey.

I had a few. I might ask them one by one if that's all right. The first one, I'm just trying to gauge exactly how much better second quarter earnings was versus the first. And if we use Slide 11, and I use those numbers to sort of that solve your revenue, it suggests second quarter EBITDA might have been about $22 million higher or about [indiscernible] better than first quarter. Is that the case, Grant?

Eric, look, I'm not going to provide quarter-on-quarter EBITDA numbers, I don't think. But as you know, the margin can move around a little bit month by month within the region we provided revenue quarter-over-quarter sort of indications, but that's a bit smoother. It's a bit more a better indicator over the long term. But certainly, as you know, it's a leveraged business. So if you increase revenue, your margin does go up slightly higher than revenue. I think the point of that chart is to show that this is like changing the ship around the ship, started to get turned around late last year as we talked about in terms of the customer metrics. It does take a bit of a lag in terms of coming through the financials. That trend is really clear on service revenue. It's more lumpy in terms of EBITDA just because of a lot of things that go in and out of it, but certainly the trend over a half-on-half and year-on-year perspective is good. I think the other point that -- just to highlight [indiscernible] sort of view, we did sort of start the year sort of double digit down in EBITDA. We finished the half, high single digits in terms of corresponding periods. So in that sense, you really see quite a strong trend coming through and has continued into the third quarter, I think, is the other point on that chart.

Just on that point, Grant, that's helpful. And I can understand you won't want to commit to an EBITDA number. But whatever the second quarter versus first quarter delta is, would it be fair to assume you'd expect that delta to accelerate in the third quarter and fourth quarter given you've got all the same mobile drivers, you have the same Fixed Wireless. And then on top of that, you've got this NBN price kicker? So you can think the quarter-on-quarter EBITDA growth should improve in 3Q and 4Q.

So it will certainly continue. Accelerate will depend on -- obviously, again, we're not providing guidance as it were. I think in terms of the pricing, which I'm sure Iñaki will talk about, that kicks in throughout the half. So these things take time to kick in. I'm not sure that's probably more a story for the fourth quarter and into 2023 in terms of the benefits of that. But the margin improvement will continue to show in the second half.

Awesome. And just a second question. I guess the accelerating top line drivers of the EBIT, I'm just worried the fixed cost base will accelerate as well. So can you just give us a bit of an update on the [indiscernible] that you previously flagged you were negotiating this quarter?

It's still being negotiated. And I think we're hoping by the end of the third quarter, we're in a position where we're getting to that point. So it's not something we can really comment on in, in that time frame.

Got it. Okay. And then maybe a third one, just going over to enterprise. Obviously, margins growing. At the moment, it's still quite high, but you've called out a push into NBN Enterprise Ethernet. So maybe if you can give us a steer on what the margin outlook for that division looks like.

Yes. Thanks, Eric. So as I mentioned before, roughly approximately 35% of business will go through on NBN. We do favor on net, one where we've got connected buildings; and secondly, where we've got an ability to use mobile services well, either FWA or 5G. We wouldn't give specific guidance on the underlying margin, but we would signal that it's clearly, as we grow revenue, we'll expect to see some dilution in margin percentage but with an aim to grow absolute margin by being efficient how we allocate capital to the right network builds.

The next question is from Lucy Huang at UBS.

I've got 3 questions as well. So firstly, just wondering if you can give us an update on the IT transformation, how that's going? And how should we be thinking then about the associated cost out beyond kind of FY '22 as a result of these IT projects? And then just secondly, with mobile ARPU mix, just wondering if you can give us some color as to what proportion of costs are now sitting on the lower budget brand, which is Lebara. And then also, with felix, any color on how that brand, both are trending, and that will be great. And then just thirdly, in relation to Fixed Wireless subscribers, you've maintained the guidance of 160,000 by the end of year, does suggest a bit of a ramp-up of net adds in the second half. So I guess, can you give us some color as to what gives you the confidence? Is modem availability increasing?

Thanks, Lucy. I'll do the first question, then I'll leave it to others to answer some color around the second. Look, in terms of IT transformation, it's probably a broader transformation in IT. IT's pretty important and is, of course, in terms of the implication. As you would have seen, we did focus on that. Giovanni and Ana talked about that at the Investor Day. We're really still leaning into that. So the reflection of the cost this year is twofold. There was elements that you see sort of the redundancies that really had to do more with the last bit of the synergy sort of requirements out of the merger, which happened at the beginning of this year, which really started to get us into simplifying the organizational structure. And now as we talk about at the Investor Day, we're leaning into simplifying both the IT infrastructure, that will also be looking at products and brands and all the things that go across the whole organization. These can be multiyear projects. Anybody that's done IT transformation, especially billing systems and lots of architecture together. So that will be multiyear. I think the planning of that is probably this year and next in terms of the heavy lifting that we're doing. So the types of numbers you see this year, we called out [ $55 million to $60 million ], which is a range, an estimate that already includes the [ $35 million ] we spent. I suspect that will continue into next year. Beyond that, I think it starts to become much more part of business as usual as we work through that transformation. So I think that's how we're looking at it. A lot of the transformation costs will also be in the CapEx side of it. But we have also -- we've already included that really in sort of the broad guidance we've given, sort of that $1 billion to $1.05 billion of CapEx over the next couple of years, already includes both transformation of the 5G network and also transformation of the IT architecture.

Yes, I think on the mobile ARPU, maybe I ask Kieren to answer that question.

Thank you, Lucy. So on the first question around mobile ARPU and the performance of the lower cost spreads or the value leading brands that we've got, so currently, our value leading -- value brands sitting around 1/3 of our customer base. So that's probably the big -- as I understand the question there. The second question is what confidence we have in the buildup to the 160,000 Fixed Wireless. So as we've spoken about, there has been chipset and modem issues throughout the year, and we're in a much better position than we were months ago, so one that gives us confidence. But the second key point is as we head to the second half, we'll start to sell into our 5G stand-alone network, so that gives us a whole new tranche of customers. And we know that this new wave of customers, we're able to get a new jump in sales as well.

Okay. Next question is from Kane Hannan at Goldman Sachs.

Just 3 for me as well. I might ask me in turn as well. So maybe just to start, so 8 months into the year, you're talking about the accelerating earnings momentum. The quarterly trends are helpful. There's a reason why you haven't put full year guidance out there? I mean, wouldn't that be an easy way to show that earnings have troughed in the first half?

You asked 3 questions. I can answer that now. I think we haven't provided guidance before, as you know, Kane, so I think we're providing most of the outlook in terms of that and get to guidance. But there's no particular reason why we haven't provided guidance at this stage other than it is accelerating through.

Yes, perfect. [indiscernible]. Just the restructuring charges and I suppose one-off charges also calling out in the first half, was there anything in FY '21 associated with those $70 million of synergies that you delivered? Any restructuring or other one-off costs? And then -- are you guys...

Yes, not really. No, these were new this year. We held off a lot of that last bit of the organizational simplification until the start of this year. So most of the synergy realization over the first 18 months post-merger was really around sort of networks and sort of telecommunication costs as it were and some of that in terms of restructuring around shop fronts and all that kind of stuff and the distribution. But in terms of the restructuring costs of core this year, this is really the first time we've spent any significant ones. And it's not just the redundancies from the organizational structure. It's also, say, leaning into next phase of simplification. I mean one of the things I think gives us a bit of confidence as to why we think they are a one-off in nature for future benefits is we do adjust them -- when we come to the dividend calculation, we do adjust and add them back in. So we are ignoring them in terms of our adjusted net paying dividend out that didn't happen because we are confident they're one-off and they provide future benefits.

Yes. Perfect. And just on the enterprise side, that 20% of legacy revenues overall, I mean is the margin on that revenue broadly the same as a division at around 50%? And just how do I think about the phasing of decline of that revenue base?

Yes. Thanks, Kane. Broadly speaking, some of the legacy revenues would look very similar to the overall base. The decline in it will be phased in 3 different ways. The legacy revenue is linked to copper shutdown, and those will follow the copper shutdown program, that's running as networks move over fully to NBN. Second is the legacy revenues that are linked to our IT transformation and that will follow as we decommission data centers or services. And then the third area is the legacy revenues linked to products, which we made a strategic decision to stop sell and replace with new services such as software-defined networks in the future. So it will be slightly different phasing across it. But yes, the margin mix of that looks very similar to the margin mix of the base.

And that should be mostly under the base by the $20 billion, $25 billion target that you guys have set?

Exactly, yes.

Our next question comes from Roger Samuel at Jefferies.

I've got 2 questions. First one, just want to unpack the high cost in this half. So can you tell us like the main drivers in terms of the synergies from the merger? It sounds like there wasn't much in this half and there's more to come in the second half of this year. And then maybe there's a decrease in handset subsidies as well because I remember you subsidized some new iPhones in this -- I think you subsidized some new iPhones earlier in the year. So maybe there's some costs coming up a year from there. That's my first question. Second question is on -- more around your cost of debt. I understand that you've got a lot of debt, which is floating. So just wondering what's your forecast for your interest costs going forward.

Sure. So look, on costs, nothing's really changed much since the Investor Day when we went through it. And really where the costs are at is we have got a fair amount of benefits from the synergies in the first half, that will flow through the second. That is there. It's obviously hitting a bit by some other cost pressures. I think, in particular, obviously, there's restructuring costs, which we've talked about, which is the main new cost into the business. As you called out, really, the handset margin is driven by 2 sort of things. Handsets are getting more expenses themselves, but largely the increase to the cost in the financing of the receivables that we offer. As you know, we take up interest-free handsets. The financing of that, which is the third parties, has increased dramatically over the last 6 months. As interest rates rise, these things rise. So that's probably been a bigger driver of cost around the margin. Electricity costs, we are ramping up the activities around 5G into the 5G upgrade, which means, the actual use of energy is higher. So it's a bit across the board in terms of cost and cost pressures. But certainly, if we hadn't had the synergies flowing through, those costs would have been higher. And what was the second question?

On the cost of debt, yes.

Yes, the cost of debt, I think it's 2 things. Obviously, we've mitigated that with the payment down and I think and a little bit of hedging. I think when we last gave a bit of the sensitivity, it was sort of 50 basis points. It was $22 million. I'm looking at change to make sure I don't get this wrong. And that's sort of now down to about $17 million, going forward from 50 basis points moving. We are continuing to look at hedging, for that sensitivity may change. I think for us, the biggest change in the tower I think is we have a lot of natural hedge now in our lease debt. So the more we've gone out sort of bad debt down the less sensitive we are to movements in interest rates.

And can you give us some guidance in terms of your interest costs?

It's -- well, I think it is [indiscernible] basis points it moves. It's about [ $7 million, $8 million ] of cost, yes.

Thanks, Roger. Next in line is Entcho Raykovski from Credit Suisse.

So my first question is just a clarification. Iñaki, opening comments, you spoke about high single-digit EBITDA growth in the second half. Just to clarify, is that restructuring costs? And how good is your visibility on this?

So I don't always agree. I don't think I did give a view for the second half. I think we're just -- we had a bit of a run rate in the first half, and it was corresponding over the first half last year, so they are different numbers.

Okay. I thought Iñaki made some comments as part of his opening remarks about high single-digit EBITDA growth. But in any case, maybe you said...

Yes. No, we did -- there's no sort of -- we didn't give guidance for the second half of what the EBITDA is going to be. But I think we did in the half much higher corresponding sort of the quarter from year to year.

Okay. And I guess if we're thinking about that run rate, so was that on an ex-restructuring cost basis? Or was that were restructuring cost included, so even on a post-restructuring cost basis, you have that sort of run rate?

Yes. So we do a pre-restructuring costs, yes. So what we're looking at is the pre-restructuring cost and net bank restructuring costs.

Okay. Got it. And then -- my second question around CapEx. If we look at your CapEx guidance, on Slide 31, should we take that to be consistent with the prior guidance of $1 billion to $1.05 billion? I think, Grant, you repeated that number earlier. It's just that if I sort of add up all the midpoints, I get to $1.06 billion. Maybe I'm just reading too much into it. And I guess even if you're retaining the CapEx guidance, what are you seeing in terms of inflationary pressure on capital costs?

So I'll do the first one first. Yes and yes is the answer. Yes, the guidance stays the same. And, yes, you read too much into it, but I can see how you do because I would take the midpoint as well and then come to a slightly higher number. We really put that into -- that's consistent with what we showed at the Investor Day, and we just divided by 2, to be honest just to say for a full year, that's our estimate. So yes, we'll still sit within that range, we think, for the year. In terms of inflationary pressures, look, again, as we mentioned at the Investor Day on the CapEx outlook, a fair chunk of it is in the [indiscernible], which had sort of fixed contracts through the course of it. That's not to say there won't be some around the margin in terms of electricity usage, but even there we are -- we have a 3-year sort of rolling sort of view on pricing there. So I think we feel pretty comfortable in terms of our ability to manage inflationary pressures on the CapEx. Obviously, we talked about OpEx, that will have some inflationary pressures over time. But in the CapEx, I think we're much more comfortable.

Okay. Great. And final one, on postpaid ARPU. If it was down marginally year-on-year and half-on-half when you exclude roaming, I'm just trying to reconcile that with the comment at the Investor Day that you're seeing strong ARPU performance. And maybe it was a relative comment or it's something that you thought you're thinking about into second half. So how should we reconcile that, sort of slightly down, explaining the outcome with stronger ARPU performance ex roaming? And should we expect underlying ARPU growth expanding into the second half?

Yes, I think we maintained with the comment that we did in the Investor Day. So on one side, still the recovery of roaming has been limited for the first half. There was very little recovery on the first quarter, and we start to see that ramping up on the second quarter. And we expect to get to similar levels pre-COVID probably within the next year. But despite that, we also see the tendency of postpaid ARPU good. I think, ultimately, you need to look this into more longer term than the different transitions that we may see during different quarters based on promotional activity, et cetera, et cetera. But overall, we are optimistic in terms of postpaid ARPU moving forward.

Thanks, Entcho. Next in line, Brian Han from Morningstar.

Three questions from me. First, can you please confirm because I am now thoroughly confused, when you say you expect a strong increase in second half EBITDA, are you referring to growth over second half '21 or first half '22?

Probably both to be honest. Yes. So we'll continue to -- I mean obviously, our focus right now is really how we're coming out of the second quarter into the year. So the focus has been on where we are now and growing into the next half. So we do expect continued momentum into the second half from where we are, where we've performed in the first half year.

Yes, just to elaborate on that. So -- I maybe when -- I didn't explain myself very well when I did the opening remarks, but we will see EBITDA growth versus the second half of last year and versus the first half of this year because the starting point of this year was significantly lower. We started to gain customer momentum at the end of last year. We're starting to see already revenue momentum, and we do see EBITDA momentum building for the second half. And why is that? Well, that's on the back of, like I said, very different customer numbers. So population is going to help us. And on the other hand, we also see Fixed Wireless momentum building up on the second half versus the first half. So all those factors are the ones that give us the -- this growth versus, like I said, first half and also the second half of last year.

Okay. Two more questions if I may. My second question was just a little bit more on restructuring costs. If the regional deal with Telstra gets approved, do you expect that to also lead to much restructuring costs?

No. The restructuring cost is related to the organizational changes that we made this year. We're not going to have any comment on what the implications will be. But we don't anticipate anything that has to do with organization or nothing material in the implications of something like MOCN on other type of activities. I think that were disclosed at a time, and then once they -- will see approves, we will comment more. But all in all, we always have explained that from a cash perspective, it's something pretty neutral for the company. And what it does is really transfer a significant OpEx and also CapEx that we have in that part of the region into different type of payments with multiplying the amount of sites that we are present x5, so that's really the ultimate implication of the MOCN. So the restructuring that we have done in the beginning of the year was more around the organizational structuring that we need.